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toll brothers 2002-10k

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toll brothers 2002-10k

  1. 1. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9186 TOLL BROTHERS, INC. (Exact name of Registrant as specified in its charter) Delaware 23-2416878 (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.) 3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006-4298 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 938-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock (par value $.01)* New York Stock Exchange and Pacific Exchange * Includes associated Right to Purchase Series A Junior Participating Preferred Stock. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ] As of December 31, 2002 the aggregate market value of the Common Stock held by non-affiliates (all persons other than executive officers and directors of Registrant) of the Registrant was approximately $1,030,887,000. As of December 31, 2002, there were 70,493,425 shares of Common Stock outstanding. Documents Incorporated by Reference: Portions of the proxy statement of Toll Brothers, Inc. with respect to the 2003 Annual Meeting of Stockholders, scheduled to be held on March 20, 2003, are incorporated by reference into Items 10 through 13 hereof.
  2. 2. PART I ITEM 1. BUSINESS General Toll Brothers, Inc., a Delaware corporation formed in May 1986, began doing business through predecessor entities in 1967. When this report uses the words quot;we,quot; quot;us,quot; and quot;our,quot; these words refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. We design, build, market and arrange financing for single-family detached and attached homes in middle-income and high-income residential communities catering to move-up, empty-nester and active-adult age-qualified homebuyers in 22 states in six regions around the United States. Our communities are generally located on land we have either developed or acquired fully approved and, in some cases, improved. Currently, we operate in the major suburban residential areas of: • southeastern Pennsylvania and Delaware • central New Jersey • the Virginia and Maryland suburbs of Washington, D.C. • Baltimore County, Maryland • the Boston, Massachusetts metropolitan area • Rhode Island • Southern New Hampshire • Fairfield, New Haven and Hartford Counties, Connecticut • Westchester and Dutchess Counties, New York • the Los Angeles metropolitan area and San Diego, California • the San Francisco Bay area of northern California • Palm Springs, California • the Phoenix, Arizona metropolitan area • Raleigh and Charlotte, North Carolina • Dallas, Austin and San Antonio, Texas • the east and west coasts of Florida • Las Vegas, Nevada • Columbus, Ohio • Nashville, Tennessee • Detroit, Michigan • Chicago, Illinois • Denver, Colorado • the Hilton Head area of South Carolina We continue to explore additional geographic areas for expansion. We market our homes primarily to middle-income and upper-income buyers, emphasizing high quality construction and customer satisfaction. In the five years ended October 31, 2002, we delivered 19,387 homes from 372 communities, including 4,430 homes from 212 communities delivered in fiscal 2002. We operate our own land development, architectural, engineering, mortgage, title, security monitoring, landscape, cable T.V., broadband Internet access, lumber distribution, house component assembly and manufacturing operations. We also own and operate golf courses and country clubs in conjunction with several of our master planned communities.
  3. 3. In order to take advantage of commercial real estate opportunities which may present themselves from time to time, we formed Toll Brothers Realty Trust Group (the quot;Trustquot;) in 1998. The Trust is owned one-third by us, one-third by a number of our senior executives and/or directors, including Robert I. Toll, Bruce E. Toll (and members of his family), Zvi Barzilay (and members of his family) and Joel H. Rassman, and one-third by the Pennsylvania State Employees Retirement System. We provide development, finance and management services to the Trust and receive fees for our services. The Trust currently owns and operates several office buildings and an apartment complex, a portion of which is rented and a portion of which remains under construction. At October 31, 2002, we were operating in 243 communities containing over 21,800 home sites which we owned or controlled through options. Of the 243 communities, 170 were offering homes for sale, 34 had not yet opened for sale and 39 were sold out but all home deliveries had not been completed. At October 31, 2002, we also owned or controlled through options approximately 19,000 home sites in 157 proposed communities. We expect to have approximately 185 selling communities by October 31, 2003. Of the approximately 40,800 lots owned or controlled through options at October 31, 2002, we owned approximately 25,800 of them. At October 31, 2002, we were offering single-family detached homes at prices, excluding customized options, generally ranging from $233,000 to $1,493,000 with an average base sales price of $501,000. We were offering single-family attached homes at prices, excluding customized options, generally ranging from $166,000 to $622,000, with an average base sales price of $322,000. On average, homebuyers added approximately 21% in options and lot premiums to the base price of homes delivered in fiscal 2002. We had backlogs of $1.87 billion (3,366 homes) at October 31, 2002 and $1.41 billion (2,727 homes) at October 31, 2001. We expect that substantially all homes in backlog at October 31, 2002 will be delivered by October 31, 2003. In recognition of our achievements, we have received numerous awards from national, state and local homebuilder publications and associations. We are the only publicly traded national homebuilder to have won all three of the industry's highest honors: America's Best Builder (1996), the National Housing Quality Award (1995), and Builder of the Year (1988). We attempt to reduce certain risks homebuilders encounter by controlling land for future development through options whenever possible, thus allowing us to obtain the necessary governmental approvals before acquiring title to the land; by generally commencing construction of a home only after executing an agreement of sale with a buyer; and by using subcontractors to perform home construction and land development work on a fixed-price basis. In order to obtain better terms or prices, or due to competitive pressures, we may purchase properties outright, or acquire an underlying mortgage, prior to obtaining all of the governmental approvals necessary to commence development. For financial information pertaining to revenues, earnings and assets, please see the accompanying financial statements and notes thereto. 2
  4. 4. Our Communities Our communities generally are located in affluent suburban areas near major highways with access to major cities. We currently operate in 22 states in six regions around the country. The following table lists the states in which we operate and the fiscal years in which we or our predecessors commenced operations: Fiscal Fiscal Year of Year of State Entry State Entry Pennsylvania 1967 Florida 1995 New Jersey 1982 Arizona 1995 Delaware 1987 Ohio 1997 Massachusetts 1988 Tennessee 1998 Maryland 1988 Nevada 1998 Virginia 1992 Michigan 1999 Connecticut 1992 Illinois 1999 New York 1993 Rhode Island 2000 California 1994 New Hampshire 2000 North Carolina 1994 Colorado 2001 Texas 1995 South Carolina 2002 We market our high-quality, detached, single-family homes primarily to quot;upscalequot; luxury home buyers, generally comprised of those persons who have previously owned a principal residence and who are seeking to buy a larger home - the so-called quot;move-upquot; market. We believe our reputation as a developer of homes for this market enhances our competitive position with respect to the sale of our smaller, more moderately priced detached homes, as well as our attached homes. We also market to the 50+ year-old quot;empty-nesterquot; market and believe that this market has strong growth potential. We have developed a number of home designs with features such as one-story living and first floor master bedroom suites, as well as communities with recreational amenities such as golf courses, pools, country clubs and recreation centers, that we believe appeal to this category of home buyer. We have integrated these designs and features with our other home types into our communities. The empty-nester market now accounts for approximately 30% of our home sales. In 1999, we opened for sale our first active-adult, age-qualified community for households in which at least one member is 55 years of age. We are currently selling from ten such communities and expect to open 14 additional age-qualified communities during the next few years. In fiscal 2002, approximately 9% of new contracts signed were in active-adult communities. We believe this figure could grow to approximately 15% over the next few years. Another part of our business is the second-home market. We have been selling in this market for several years in Arizona, California and Florida and are expanding this product line into Delaware, Maryland, Pennsylvania and South Carolina. We believe that the demographics of our move-up, empty-nester, active-adult, age-qualified and second-home up-scale markets provide us with the potential for growth in the coming decade. According to the U.S. Census Bureau, the number of households earning $100,000 or more (in constant 2001 dollars) now stands at 15.1 million households, approximately 13.8% of all households. This group has grown at eight times the rate of increase of all U.S. households over the past two decades. According to Claritas, Inc., a provider 3
  5. 5. of demographic information, approximately seven million of these households are located in our current markets. The largest group of baby boomers, the more than four million born annually between 1954 and 1964, are now 38 to 48 years of age and in their peak move- up home buying years. The leading edge of the baby boom generation has now entered its 50s and the empty-nester market. The number of households with persons 55 to 64 years old, the focus of our age-qualified communities, is projected to increase by over 47% by the Year 2010 according to the U.S. Census Bureau. American Demographics magazine predicts that, as the baby boomers mature and become more affluent, second home ownership will grow from approximately 6.4 million homes in 2000 to 10 million homes in 2010. We also develop master planned communities and currently have 14 such communities containing approximately 12,700 home sites. We expect to open several additional communities during the next few years. These communities, many of which contain golf courses and other country club type amenities, enable us to offer multiple home types and sizes to a broad range of move-up, empty-nester, active-adult and second-home buyers. We realize efficiencies from shared common costs such as land development and infrastructure over the several communities within the master planned community. We currently have open master planned communities in California, Florida, Michigan, North Carolina, Pennsylvania, Virginia and South Carolina. Each single-family detached-home community offers several home plans, with the opportunity for homebuyers to select various exterior styles. We design each community to fit existing land characteristics. We strive to achieve diversity among architectural styles within an overall planned community by offering a variety of house models and several exterior design options for each house model, by preserving existing trees and foliage whenever practicable, and by curving street layouts which allow relatively few homes to be seen from any vantage point. Normally, homes of the same type or color may not be built next to each other. Our communities have attractive entrances with distinctive signage and landscaping. We believe that our added attention to community detail avoids a quot;developmentquot; appearance and gives each community a diversified neighborhood appearance that enhances home values. Our attached home communities generally offer one- to four-story homes, provide for limited exterior options and often include commonly-owned recreational facilities such as playing fields, swimming pools and tennis courts. Our Homes In most of our single-family detached-home communities, we offer at least four different house floor plans, each with several substantially different architectural styles. In addition, the exterior of each basic floor plan may be varied further by the use of stone, stucco, brick or siding. Attached home communities generally offer two or three different floor plans with two, three or four bedrooms. In all of our communities, a wide selection of options is available to purchasers for additional charges. The number and complexity of options typically increase with the size and base selling price of our homes. Major options include additional garages, guest suites and other additional rooms, finished lofts and extra fireplaces. On average, options purchased by our homebuyers, including lot premiums, added approximately 21% to the base price of homes purchased in fiscal 2002. 4
  6. 6. The range of base sales prices for our different lines of homes at October 31, 2002, was as follows: Detached Homes: Move-up $ 246,000 - $ 559,000 Executive 247,000 - 770,000 Estate 345,000 - 1,493,000 Active adult, age-qualified 233,000 - 443,000 Attached Homes: Flats $ 166,000 -$ 582,000 Townhomes 200,000 - 450,000 Carriage homes 276,000 - 622,000 Contracts for the sale of homes are at fixed prices. The prices at which homes are offered in a community have generally increased from time to time during the period in which that community is offering homes for sale; however, there can be no assurance that sales prices will increase in the future. We offer some of the same basic home designs in similar communities. However, we are continuously developing new designs to replace or augment existing ones to ensure that our homes reflect current consumer tastes. We use our own architectural staff, and also engage unaffiliated architectural firms, to develop new designs. During the past year, we introduced 116 new models. We operate in six regions around the United States. The following table summarizes by region closings and new contracts signed during fiscal 2002 and 2001, and backlog at October 31, 2002 and 2001: Closings New Contracts(1) Backlog(2) Units $Mill Units $Mill Units $Mill FISCAL 2002 Northeast (CT,MA,NH,NJ,NY,RI) 886 465.3 895 519.5 660 384.7 Mid-Atlantic (DE,MD,PA,VA) 1,580 735.0 1,881 890.1 1,134 547.4 Midwest(IL,MI,OH) 394 187.3 398 202.9 290 152.7 Southeast(FL,NC,TN) 614 258.9 670 312.0 384 204.5 Southwest (AZ,CO,NV,TX) 513 270.4 707 351.4 536 268.5 West(CA) 443 362.4 562 472.3 362 308.5 4,430 2,279.3 5,113 2,748.2 3,366 1,866.3 FISCAL 2001 Northeast 942 477.6 870 440.6 651 330.6 Mid-Atlantic 1,395 646.1 1,549 719.1 833 392.2 Midwest 455 211.4 534 232.3 330 151.0 Southeast 519 233.9 535 238.7 328 151.4 Southwest 573 286.6 498 264.7 342 187.6 West 474 324.9 380 278.5 243 198.6 Total 4,358 2,180.5 4,366 2,173.9 2,727 1,411.4 (1) New contracts include $13.7 million (43 homes) and $15.4 million (52 homes) in fiscal 2002 and 2001,respectively, from an unconsolidated 50% owned joint venture. (2) Backlog at October 31, 2002 and 2001 include $7.5 million (24 homes) and $7.8 million (25 homes) from an unconsolidated 50% owned joint venture. 5
  7. 7. The following table summarizes certain information with respect to our residential communities under development at October 31, 2002: Homes Under Number of Homes Homes Contract and Homesites Region Communities Approved Closed Not Closed Available Northeast 50 4,306 1,482 660 2,164 Mid-Atlantic 75 11,778 2,871 1,134 7,773 Southeast 27 3,763 1,361 384 2,018 Southwest 40 3,847 1,209 536 2,102 Midwest 21 2,687 941 290 1,456 West 30 3,929 605 362 2,962 Total 243 30,310 8,469 3,366 18,475 At October 31, 2002, significant site improvements had not commenced on approximately 10,900 of the 18,475 available home sites. Of the 18,475 available home sites, 1,133 were not owned by us, but were controlled through options and 43 lots were owned by a 50% owned joint venture. Of the 243 communities under development at October 31, 2002, 170 were offering homes for sale, 34 had not yet opened for sale and 39 were sold out, but not all home deliveries had been completed. Of the 170 communities in which homes were being offered for sale, 142 were single-family detached home communities containing a total of 187 homes (exclusive of model homes) under construction but not under contract, and 28 were attached-home communities containing a total of 118 homes (exclusive of model homes) under construction but not under contract. Land Policy Before entering into an agreement to purchase a land parcel, we complete extensive comparative studies and analyses on detailed company-designed forms that assist us in evaluating the acquisition. We generally attempt to enter into option agreements to purchase land for future communities. However, in order to obtain better terms or prices, or due to competitive pressures, we may acquire property outright from time to time. In addition, we have, at times, acquired the underlying mortgage on a property and subsequently obtained title to that property. Our options, or agreements, to purchase land are generally entered into on a non-recourse basis, thereby limiting our financial exposure to the amounts invested in property approval and pre-development costs. The use of options or purchase agreements may increase the price of land that we eventually acquire, but significantly reduces our risk by allowing us to obtain the necessary development approvals before acquiring the land. As approvals are obtained, the values of the options, purchase agreements and land generally increases. We have the ability to extend many of these options for varying periods of time, in some cases by making an additional payment and, in other cases, without any additional payment. Our purchase agreements are typically subject to numerous conditions including, but not limited to, our ability to obtain necessary governmental approvals for the proposed community. Often, our down payment on an agreement will be returned to us if all approvals are not obtained, although pre-development costs may not be recoverable. We generally have the right to cancel any of our agreements to purchase land by forfeiture of our payment on the agreement. In such instances, we generally are not able to recover any pre-development costs. 6
  8. 8. Our ability to continue development activities over the long-term will be dependent upon our continued ability to locate and enter into options or agreements to purchase land, obtain governmental approvals for suitable parcels of land, and consummate the acquisition and complete the development of such land. While we believe that there is significant diversity in our existing markets and that this diversity provides some protection from the vagaries of individual local economies, we believe that greater geographic diversification will provide additional protection and more opportunities for growth. We continue to look to enter new markets. The following is a summary, at October 31, 2002, of the parcels of land that we either owned or controlled through options or purchase agreements for proposed communities, as distinguished from those currently under development: Number of Number of Region Communities Homes Planned Northeast 49 5,605 Mid-Atlantic 72 8,931 Southeast 6 931 Southwest 16 2,061 Midwest 7 957 West 7 518 Total 157 19,003 Of the 19,003 planned home sites, 5,114 of them were owned by us. At October 31, 2002, the aggregate purchase price of land parcels under option and purchase agreements was approximately $860 million, of which we had paid or deposited approximately $64 million. We evaluate all of the land under our control for proposed communities on an ongoing basis with respect to economic and market feasibility. During the year ended October 31, 2002, such feasibility analyses resulted in approximately $2.5 million of capitalized costs related to proposed communities being charged to expense because they were no longer deemed to be recoverable. There can be no assurance that we will be successful in securing the necessary development approvals for the land currently under our control or for land we may acquire control of in the future or that, upon obtaining such development approvals, we will elect to complete the purchases of land under option or complete the development of land that we own. We have generally been successful in the past in obtaining governmental approvals, have substantial land currently under control for which we have obtained or are seeking approvals (as set forth in the table above), and devote significant resources to locating suitable land for future development and to obtaining the required approvals on land under our control. Failure to locate sufficient suitable land or to obtain necessary governmental approvals may impair our ability over the long-term to maintain current levels of development activities. We believe that we have an adequate supply of land in our existing communities or held for future development (assuming that all properties are developed) to maintain our operations at current levels for several years. 7
  9. 9. Community Development We expend considerable effort in developing a concept for each community, which includes determining the size, style and price range of the homes, the layout of the streets and individual lots, and the overall community design. After obtaining the necessary governmental subdivision and other approvals, which may take several years, we improve the land by grading and clearing it; installing roads, recreational amenities and underground utility lines; erecting distinctive entrance structures; and staking out individual home sites. Each community is managed by a project manager who is usually located at the site. Working with sales staff, construction managers, marketing personnel and, when required, other in-house and outside professionals such as accountants, engineers, architects and legal counsel, the project manager is responsible for supervising and coordinating the various developmental steps from the approval stage through land acquisition, marketing, selling, construction and customer service, and for monitoring the progress of work and controlling expenditures. Major decisions regarding each community are made in consultation with senior members of our management team. We recognize revenue from home sales only when title and possession of a home are transferred to the buyer, which generally occurs shortly after home construction is substantially completed. The most significant variable affecting the timing of our revenue stream, other than housing demand, is receipt of final land regulatory approvals, which, in turn, permits us to begin the process of obtaining executed sales contracts from home buyers. Receipt of such final approvals is not seasonal. Although our sales and construction activities vary somewhat by season, which affects the timing of closings, any such seasonal effect is relatively insignificant compared to the effect of receipt of final governmental approvals. Subcontractors perform all home construction and land development work, generally under fixed-price contracts. We act as a general contractor and purchase some, but not all, of the building supplies we require. See quot;Manufacturing/Distribution Facilitiesquot; in Item 2. While we have experienced some shortages from time to time in the availability of subcontractors in some markets, we do not anticipate any material effect from these shortages on our home building operations. Our construction managers and assistant construction managers coordinate subcontracting activities and supervise all aspects of construction work and quality control. One of the ways we seek to achieve home buyer satisfaction is by providing our construction managers with incentive compensation arrangements based on each home buyer's satisfaction as expressed by their responses on pre-closing and post-closing questionnaires. We maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with our activities including, among others, general liability, quot;all-riskquot; property, workers' compensation, automobile, and employee fidelity. We accrue for our expected costs associated with the deductibles and self-insured retentions. Marketing We believe that our marketing strategy, which emphasizes our more expensive quot;Estatequot; and quot;Executivequot; lines of homes, has enhanced our reputation as a builder-developer of high-quality upscale housing. We believe this reputation results in greater demand for all of our lines of homes. To enhance this image, we generally include attractive decorative features such as chair rails, crown moldings, dentil moldings, vaulted and coffered ceilings and 8
  10. 10. other aesthetic elements, even in our less expensive homes, based on our belief that this additional construction expense improves our marketing and sales effort. In determining the prices for our homes, we utilize, in addition to management's extensive experience, an internally developed value analysis program that compares our homes with homes offered by other builders in each local marketing area. In our application of this program, we assign a positive or negative dollar value to differences between our product features and those of our competitors, such as house and community amenities, location and reputation. We expend great effort in designing and decorating our model homes, which play an important role in our marketing. In our models, we create an attractive atmosphere, with bread baking in the oven, fires burning in fireplaces, and music playing in the background. Interior decorating varies among the models and is carefully selected to reflect the lifestyles of prospective buyers. During the past several years, we have received numerous awards from various homebuilder associations for our interior merchandising. We typically have a sales office in each community that is staffed by our own sales personnel. Sales personnel are generally compensated with both salary and commission. A significant portion of our sales is derived from the introduction of customers to our communities by local cooperating realtors. We advertise extensively in newspapers, other local and regional publications, and on billboards. We also use videotapes and attractive color brochures to market our communities. The Internet is also an important resource we use in marketing and providing information to our customers. A visitor to our award winning website, www.tollbrothers.com, can obtain detailed information regarding our communities and homes across the country and take panoramic or video tours of our homes. All our homes are sold under our limited warranty as to workmanship and mechanical equipment. Many homes also come with a limited ten-year warranty as to structural integrity. Competition The homebuilding business is highly competitive and fragmented. We compete with numerous homebuilders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than we have. Sales of existing homes also provide competition. We compete primarily on the basis of price, location, design, quality, service and reputation; however, we believe our financial stability, relative to others in our industry, has become an increasingly favorable competitive factor. Regulation and Environmental Matters We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular property or locality. In a number of our markets, there has been an increase in state and local legislation authorizing the acquisition of land as dedicated open space, mainly by governmental, quasi-public and non-profit entities. In addition, we are subject to various licensing, registration and filing requirements in connection with the construction, advertisement and sale of homes in our communities. Although these laws have increased our overall costs, they have not had a material effect on us, except to the extent that 9
  11. 11. their application may have delayed the opening of communities or caused us to conclude that development of a proposed community would not be economically feasible, even if any or all necessary governmental approvals were obtained. See quot;Land Policyquot; in this Item 1. We also may be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums in one or more of the areas in which we operate. Generally, such moratoriums relate to insufficient water or sewage facilities, or inadequate road capacity. In order to secure certain approvals, in some areas, we may have to provide affordable housing at below market rental or sales prices. The impact on us will depend on how the various state and local governments in the areas in which we engage, or intend to engage, in development, implement their programs for affordable housing. To date, these restrictions have not had a material impact on us. We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of public health and the environment (quot;environmental lawsquot;). The particular environmental laws that apply to any given community vary greatly according to the location and environmental condition of the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and/or may prohibit or severely restrict development in certain environmentally sensitive regions or areas. We maintain a policy of engaging independent environmental consultants to evaluate land for the potential of hazardous or toxic materials, wastes or substances before consummating an acquisition. Because we generally have obtained such assessments for the land we have purchased, we have not been significantly affected to date by the presence of such materials. Employees At October 31, 2002, we employed 2,960 full-time persons; of these, 120 were in executive positions, 344 were engaged in sales activities, 309 were in project management activities, 1,183 were in administrative and clerical activities, 686 were in construction activities, 154 were in architectural and engineering activities and 164 were in manufacturing and distribution. We consider our employee relations to be good. Factors That May Affect Our Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words like quot;anticipate,quot; quot;estimate,quot; quot;expect,quot; quot;project,quot; quot;intend,quot; quot;plan,quot; quot;believe,quot; quot;may,quot; quot;can,quot; quot;could,quot; quot;mightquot; and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. Such statements include information relating to anticipated operating results, financial resources, changes in revenues, changes in profitability, interest expense, growth and expansion, anticipated income to be realized from our investments in joint ventures and the Toll Brothers Realty Trust Group, the ability to acquire land, the ability to gain approvals and to open new communities, the ability to sell homes and properties, the ability to deliver homes from backlog, the ability to secure materials and subcontractors, the 10
  12. 12. ability to produce the liquidity and capital necessary to expand and take advantage of opportunities in the future, and stock market valuations. From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-Q and 8-K, in press releases and in other material released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made by us, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward- looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. The following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below, including factors unknown to us and factors known to us which we have not determined to be material, could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section. We operate in a very competitive environment, which is characterized by competition from a number of other homebuilders in each market in which we operate. Actions or changes in plans by competitors may negatively affect us. Our business can be affected by changes in general economic and market conditions, as well as local economic and market conditions where our operations are conducted and where prospective purchasers of our homes live. The impact and uncertainties created by the September 11, 2001 terrorist attacks and the consequences of any future terrorist attacks, as well as other events affecting the national and world economies, may affect our business. The plans for future development of our residential communities can be affected by a number of factors including, for example, time delays in obtaining necessary governmental permits and approvals and legal challenges to our proposed communities. Our operations depend on our ability to continue to obtain land for the development of residential communities at reasonable prices. Changes in competition, availability of financing, customer trends and market conditions may impact our ability to obtain land for new residential communities. The development of our residential communities may be affected by circumstances beyond our control, including weather conditions, work stoppages, labor disputes, unforeseen engineering, environmental or geological problems and unanticipated shortages of or increases in the 11
  13. 13. cost of materials and labor. Any of these circumstances could give rise to delays in the completion of, or increase the cost of, developing one or more of our residential communities. The interest rate on our revolving credit facility is subject to fluctuation based on changes in short-term interest rates, the amount of borrowings we have incurred and the ratings which national rating agencies assign to our outstanding debt securities. Our interest expense could increase as a result of these factors. Our business and earnings are substantially dependent on our ability to obtain financing for our development activities. Increases in interest rates, concerns about the market or the economy, or consolidation or dissolution of financial institutions could increase our cost of borrowing and/or reduce our ability to obtain the funds required for our future operations. Our business and earnings are also substantially dependent on the ability of our customers to finance the purchase of their homes. Limitations on the availability of financing or increases in the cost of such financing could adversely affect our operations. We believe that our recorded tax balances are adequate. However, it is not possible to predict the effects of possible changes in the tax laws or changes in their interpretation. These changes or interpretations, if made, could have a material negative effect on our operating results. Claims have been brought against us in various legal proceedings which have not had, and are not expected to have, a material adverse effect on the business or on our financial condition; however, additional legal and tax claims may arise from time to time, and it is possible that our cash flows and results of operations could be affected from time to time by the resolution of one or more of such matters. We are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. In addition, the costs of insuring against construction defects and product liability claims are high, the amount of coverage offered by insurance companies is currently limited, and the amounts of deductibles and self insured retentions are high. There can be no assurance that this coverage will not be further restricted or become more costly. If we are not able to obtain adequate insurance against these claims, we may experience losses that could hurt our business. There is intense competition to attract and retain management and key employees in the markets where our operations are conducted. Our business could be adversely affected if we are unable to recruit or retain key personnel in one or more of the markets in which we conduct our operations. Available Information We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. 12
  14. 14. Our principal Internet address is www.tollbrothers.com. We make available free of charge on www.tollbrothers.com our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number: Toll Brothers, Inc. 3103 Philmont Ave. Huntington Valley, PA 19006 Attention: Director of Investor Relations Telephone: (215) 938-8000 ITEM 2. PROPERTIES Headquarters Our corporate offices, which we own, contain approximately 70,000 square feet, and are located at 3103 Philmont Avenue, Huntingdon Valley, Montgomery County, Pennsylvania. Manufacturing/Distribution Facilities We own a facility of approximately 200,000 square feet located in Morrisville, Pennsylvania. We also own a facility of approximately 100,000 square feet located in Emporia, Virginia, which we acquired in 1999. In both facilities we manufacture open wall panels, roof and floor trusses, and certain interior and exterior millwork to supply a portion of our construction needs. These operations also permit us to purchase wholesale lumber, plywood, windows, doors, certain other interior and exterior millwork and other building materials to supply to our communities. We believe that increased efficiency, cost savings and productivity result from the operation of these plants and from the wholesale purchase of material. The Pennsylvania plant generally does not sell or supply to any purchaser other than to us, while the Virginia plant sells wall panels and roof and floor trusses to us as well as to a small number of outside purchasers. Regional and Other Facilities We lease office and warehouse space in various locations, none of which is material to our business. ITEM 3. LEGAL PROCEEDINGS We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that the disposition of these matters will not have a material adverse effect on our business or our financial condition. There are no proceedings required to be disclosed pursuant to Item 103 of Regulation S-K. 13
  15. 15. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended October 31, 2002. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table includes information with respect to all of our executive officers at October 31, 2002. All executive officers serve at the pleasure of our Board of Directors. Name Age Positions Robert I. Toll 61 Chairman of the Board, Chief Executive Officer and Director Zvi Barzilay 56 President, Chief Operating Officer and Director Joel H. Rassman 57 Executive Vice President, Treasurer, Chief Financial Officer and Director Robert I. Toll, with his brother Bruce E. Toll, the Vice Chairman of the Board and a Director of Toll Brothers, Inc., co-founded our predecessors' operations in 1967. Robert I. Toll has been our Chief Executive Officer and Chairman of the Board since our inception. Zvi Barzilay joined us as a project manager in 1980 and has been an officer since 1983. Mr. Barzilay was elected a Director of Toll Brothers, Inc. in 1994. He has held the position of Chief Operating Officer since May 1998 and the position of President since November 1998. Joel H. Rassman joined us as Senior Vice President, Chief Financial Officer and Treasurer in 1984. Mr. Rassman has been a Director of Toll Brothers, Inc. since 1996. He has held the position of Executive Vice President since May 2002. 14
  16. 16. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is principally traded on the New York Stock Exchange (Symbol: TOL). It is also listed on the Pacific Exchange. The following table sets forth the price range of our common stock on the New York Stock Exchange for each fiscal quarter during the two years ended October 31, 2002. All amounts reflect a 2-for-1 stock split in the form of a stock dividend that occurred in March 2002. Three Months Ended October 31 July 31 April 30 January 31 2002 High $ 27.20 $ 31.80 $ 30.20 $ 23.20 Low $ 17.76 $ 20.81 $ 20.93 $ 15.42 2001 High $ 20.12 $ 22.07 $ 19.85 $ 22.63 Low $ 12.93 $ 15.20 $ 16.20 $ 15.60 We have not paid any cash dividends on our common stock to date and expect that, for the foreseeable future, we will not do so; rather, we will follow a policy of retaining earnings in order to finance the continued growth of our business. The payment of dividends is within the discretion of our Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including our earnings, capital requirements, our operating and financial condition, and any contractual limitation then in effect. In this regard, our senior subordinated notes contain restrictions on the amount of dividends we may pay on our common stock. In addition, our bank revolving credit agreement and bank term loan require the maintenance of minimum consolidated stockholders' equity, which restricts the amount of dividends we may pay. At October 31, 2002, under the most restrictive of these provisions, we could have paid up to approximately $350 million of cash dividends. At October 31, 2002, there were approximately 744 record holders of our common stock. 15
  17. 17. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and housing data at and for each of the five fiscal years ended October 31, 2002. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto, included in this report beginning at page F-1, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this report. Summary Consolidated Income Statement Data (amounts in thousands, except per share data)(share and per share amounts have been adjusted for a two-for-one stock split in March 2002): Year ended October 31 2002 2001 2000 1999 1998 Revenues $2,328,972 $2,229,605 $1,814,362 $1,464,115 $1,210,816 Income before income taxes and extraordinary item $347,318 $337,889 $230,966 $162,750 $134,293 Income before extraordinary item $219,887 $213,673 $145,943 $103,027 $85,819 Extraordinary loss (1,461) (1,115) Net income $219,887 $213,673 $145,943 $101,566 $84,704 Earnings per share: Basic: Income before extraordinary item $3.12 $2.98 $2.01 $1.40 $1.18 Extraordinary loss (0.02) (0.02) Net income $3.12 $2.98 $2.01 $1.38 $1.16 Weighted average number of shares outstanding 70,472 71,670 72,537 73,378 72,965 Diluted: Income before extraordinary item $2.91 $2.76 $1.95 $1.38 $1.12 Extraordinary loss (0.02) (0.01) Net income $2.91 $2.76 $1.95 $1.36 $1.11 Weighted average number of shares outstanding 75,480 77,367 74,825 74,872 76,721 Summary Consolidated Balance Sheet Data(amounts in thousands): As of October 31: 2002 2001 2000 1999 1998 Inventory $2,551,061 $2,183,541 $1,712,383 $1,443,282 $1,111,223 Total assets $2,895,365 $2,532,200 $2,030,254 $1,668,062 $1,254,468 Debt Loans payable $253,194 $362,712 $326,537 $213,317 $182,292 Mortgage company warehouse loan 48,996 24,754 Subordinated notes 819,663 669,581 469,499 469,418 269,296 Total debt $1,121,853 $1,057,047 $796,036 $682,735 $451,588 Stockholders' equity $1,129,509 $912,583 $745,145 $616,334 $525,756 16
  18. 18. Housing Data Fiscal year: 2002 2001 2000 1999 1998 Number of homes closed 4,430 4,358 3,945 3,555 3,099 Sales value of homes closed (in thousands) $2,279,261 $2,180,469 $1,762,930 $1,438,171 $1,206,290 Number of homes contracted(1) 5,113 4,366 4,418 3,845 3,387 Sales value of homes contracted (in thousands)(1) $2,748,171 $2,173,938 $2,149,366 $1,640,990 $1,383,093 As of October 31 Number of homes in backlog(1) 3,366 2,727 2,779 2,381 1,892 Sales value of homes in backlog(1) $1,866,294 $1,411,374 $1,434,946 $1,067,685 $814,714 (1) New contracts for fiscal 2002 and 2001 included $13.7 million (43 homes) and $15.4 million (52 homes), respectively, from an unconsolidated 50% owned joint venture. Backlog as of October 31, 2002 and 2001 included $7.5 million (24 homes) and $7.8 million (25 homes), respectively, from this joint venture. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The preparation of our consolidated financial statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the recognition of income and expenses, impairment of assets, estimates of future improvement costs, capitalization of costs, provision for litigation, insurance and warranty claims and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Basis of Presentation Our financial statements include the accounts of Toll Brothers, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 20% to 50% owned partnerships and affiliates are accounted for on the equity method. Investments in less than 20% owned entiites are accounted for on the cost method. Inventory Inventory is stated at the lower of cost or fair value in accordance with Statement of Financial Accounting Standards (quot;SFASquot;) No. 121, quot;Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Ofquot;. In addition to direct acquisition, land development and home construction costs, costs include interest, real estate taxes and direct 17
  19. 19. overhead costs related to development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction. It takes approximately four to five years to fully develop, sell and deliver all the homes in one of our typical communities. Longer or shorter time periods are possible depending on the number of home sites in a community. Our master planned communities, consisting of several smaller communities, may take up to 10 years to complete. Since our inventory is considered a long-lived asset under accounting principles generally accepted in the United States, we are required to review the carrying value of each of our communities and writedown the value of those communities for which we believe the values are not recoverable. When the profitability of a current community deteriorates or the sales pace declines significantly or some other factor indicates a possible impairment in the recoverability of the asset, we evaluate the property in accordance with the guidelines of SFAS No. 121. If this evaluation indicates an impairment loss should be recognized, we charge cost of sales for the estimated impairment loss in the period determined. In addition, we review all the land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not we expect to proceed with the development of the land. Based upon this review, we decide: (a) as to land that is under a purchase contract but not owned, whether the contract will be terminated or renegotiated; and (b) as to land we own, whether the land can be developed as contemplated or in an alternative manner, or should be sold. We then further determine which costs that have been capitalized to the property are recoverable and which costs should be written off. Income Recognition Revenue and cost of sales are recorded at the time each home, or lot, is closed and title and possession are transferred to the buyer. Land, land development and related costs (both incurred and estimated to be incurred in the future) are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Any changes to the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification method. The estimated land, common area development and related costs of master planned communities (including the cost of golf courses, net of their estimated residual value) are allocated to individual communities within a master planned community on a relative sales value basis. Any change in the estimated costs are allocated to the remaining lots in each of the communities of the master planned community. Joint Venture Accounting We have investments in three joint ventures with independent third parties to develop and sell land that was owned or currently is owned by our venture partners. We recognize our share of earnings from the sale of lots to other builders. We do not recognize earnings from lots we purchase, but instead reduce our cost basis in these lots by our share of the earnings on those lot sales. We have agreed to purchase 180 lots from one of the ventures and have the right to purchase up to 385 lots from the second. The third venture has sold all the land that it owned and is currently in the process of completing the final land improvements which could take 12 months or more to finish. The joint ventures also participate in the profits earned on home sales from the lots sold to other builders above certain agreed upon levels. At October 31, 2002, we had approximately $12.7 million invested in these joint ventures and 18
  20. 20. were committed to contribute additional capital of approximately $30 million if the joint ventures require it. In addition, we effectively own one-third of Toll Brothers Realty Trust Group (the quot;Trustquot;), which was formed with a number of our senior executives and directors and with the Pennsylvania State Employees Retirement System to take advantage of commercial real estate opportunities that may present themselves from time to time. We provide development, finance and management services to the Trust and receive fees under various agreements. At October 31, 2002, our investment in the Trust was $7.5 million. We also entered into a subscription agreement whereby each group of investors agreed to invest an additional $9.3 million if required by the Trust. The original subscription agreement, which was to expire in June 2002, was extended to August 2003. The Trust currently owns and operates several office buildings and an apartment complex, a portion of which is rented and a portion of which remains under construction. We also own 50% of a joint venture with an unrelated third party that is currently selling and building an active-adult, age-qualified community. At October 31, 2002, our investment was $1.2 million in this joint venture. We do not have any further commitment to contribute additional capital to this joint venture. We do not currently guarantee any indebtedness of the joint ventures or the Trust. Our total commitment to these entities is not material to our financial condition. These investments are accounted for on the equity method. RESULTS OF OPERATIONS The following table provides a comparison of certain income statement items related to our operations (amounts in millions): Year ended October 31, 2002 2001 2000 $ % $ % $ % Home sales Revenues 2,279.3 2,180.5 1,762.9 Costs 1,655.3 72.6 1,602.3 73.5 1,337.1 75.8 Land sales Revenues 36.2 27.5 38.7 Costs 25.7 70.9 21.5 78.0 29.8 77.0 Equity earnings in unconsolidated joint ventures 1.9 6.8 3.3 Interest and other 11.7 14.9 9.5 Total revenues 2,329.0 2,229.6 1,814.4 Selling, general and administrative expenses 236.1 10.1 209.7 9.4 170.4 9.4 Interest expense 64.5 2.8 58.2 2.6 46.2 2.5 Total costs and expenses 1,981.7 85.1 1,891.7 84.8 1,583.4 87.3 Operating income 347.3 14.9 337.9 15.2 231.0 12.7 Note: Percentages for selling, general and administrative expenses, interest expense, total costs and expenses, and operating income are based on total revenues. Amounts may not add due to rounding. 19
  21. 21. FISCAL 2002 COMPARED TO FISCAL 2001 Home Sales Home sales revenues for fiscal 2002 were higher than those for fiscal 2001 by approximately $99 million, or 5%. The revenue increase was attributable to a 2% increase in the number of homes delivered and a 3% increase in the average price of the homes delivered. The increase in the average price of the homes delivered in fiscal 2002 was principally the result of increased base selling prices and an increase in the average value of options and lot premiums that our buyers paid. In fiscal 2002, our buyers paid approximately 21% above the base selling price for options and lot premiums. The slight increase in the number of homes delivered in fiscal 2002 was due primarily to the small increase in the number of delivering communities and a slight decline in the number of homes delivered per community. We have encountered and continue to encounter delays in the opening of new communities and new sections of existing communities due to increased governmental regulation in many of the markets in which we operate. These delays resulted in a decline in the number of selling communities we had in the later part of fiscal 2000, which did not reverse until the middle of fiscal 2001. In addition, it often takes more than nine months from the signing of an agreement of sale to the delivery of a home to a buyer. Because of the delays in the opening of new communities in fiscal 2000 and 2001 and the long period of time before a new community can start delivering homes once it opens for sale, the increase in the average number of communities delivering homes in fiscal 2002 compared to fiscal 2001 was slight. The number of homes delivered per community in fiscal 2002 declined slightly compared to fiscal 2001. This decline was primarily due to the decline in backlog at October 31, 2001 as compared to October 31, 2000 and a softness in new contract signings that we encountered in the first portion of the first quarter of fiscal 2002. The decline in backlog at October 31, 2001 and the softness in the first part of the first quarter of fiscal 2002 were due primarily to the slowing economy exacerbated by the tragic events of September 11, 2001. The value of new sales contracts signed was $2.75 billion (5,113 homes) in fiscal 2002, a 26% increase over the $2.17 billion (4,366 homes) signed in fiscal 2001. This increase is attributable to a 17% increase in the number of homes sold and an 8% increase in the average selling price of the homes (due primarily to the location and size of homes sold and increases in base selling prices). The increase in the number of homes sold is attributable to an increase in the number of communities from which we were selling and the continued demand for our homes. At October 31, 2002, we were selling from 170 communities compared to 155 communities at October 31, 2001. We believe that the demand for our homes is attributable to an increase in the number of affluent households, the maturation of the baby boom generation, a constricted supply of available new home sites, attractive mortgage rates and the belief on the part of potential customers that the purchase of a home is a stable investment in the current period of economic uncertainty. At October 31, 2002, we had over 40,800 home sites under our control nationwide in markets we consider to be affluent. At October 31, 2002, our backlog of homes under contract was $1.87 billion (3,366 homes), 32% higher than the $1.41 billion (2,727 homes) backlog at October 31, 2001. The increase in backlog is primarily attributable to the increase in the number of new contracts signed and the increased prices of the homes sold during fiscal 2002 as previously discussed. Based on the size of our current backlog, the continued demand for our homes, the increased 20
  22. 22. number of selling communities from which we are operating and the additional communities we expect to open in the early part of fiscal 2003, we believe that we will deliver approximately 5,000 homes in fiscal 2003 and the average delivered price of those homes will be between $530,000 and $540,000. Home costs as a percentage of home sales revenues decreased to 72.6% in fiscal 2002 compared to 73.5% in fiscal 2001. The decrease was largely the result of selling prices increasing at a greater rate than costs, lower land and improvement costs, improved operating efficiencies and lower inventory writedowns, offset in part by the cost of increased sales incentives provided to customers in the later part of the fourth quarter of fiscal 2001 and the beginning of the first quarter of fiscal 2002. These incentives were used to help increase new contract signings which were adversely affected by the economic slowdown in the later part of fiscal 2001 and the effect the tragic events of September 11, 2001 had on new orders. We incurred $6.1 million in write-offs in fiscal 2002 as compared to $13.0 million in fiscal 2001. In fiscal 2003, we expect that home costs will increase slightly as a percentage of home sales revenues due primarily to geographic and product mix changes. Land Sales We are developing several master planned communities in which we sell land to other builders. The amount of land sales will vary from year to year depending upon the scheduled timing of the delivery of the land parcels. Land sales amounted to $36.2 million for fiscal 2002, as compared to $27.5 million for fiscal 2001. In fiscal 2003, land sales are expected to amount to approximately $20 million. Equity Earnings in Unconsolidated Joint Ventures We are a party to several joint ventures and in Toll Brothers Realty Trust Group (the quot;Trustquot;). We recognize income for our proportionate share of the earnings from these entities. (See quot;Critical Accounting Policies - Joint Venture Accountingquot; for a narrative of our investment in and commitments to these entities.) In fiscal 2002 and 2001, only two of the joint ventures were operating. We recognized $1.9 million of earnings from these entities in fiscal 2002 compared to $6.8 million in fiscal 2001. The decline in earnings was caused by the reduction in the number of lots delivered by one of the joint ventures in fiscal 2002 compared to fiscal 2001. The reduction in fiscal 2002 was the result of fewer lots being available for sale by the joint venture due to the delivery of the last lots owned by it. Earnings from joint ventures will vary significantly from year to year depending on the level of activity of the entities. For fiscal 2003, we expect to realize approximately $4 million of income from our investments in the joint ventures and the Trust. Interest and Other Income Interest and other income decreased $3.2 million in fiscal 2002 compared to fiscal 2001. The decrease was principally due to a decrease in interest income, a decrease in earnings from our ancillary businesses and a non- recurring gain in the fiscal 2001 from the sale of an office building constructed by us, offset, in part, by increased income from retained customer deposits. Selling, General and Administrative Expenses (quot;SG&Aquot;) SG&A spending increased by $26.4 million or 12.6% in fiscal 2002 as compared to fiscal 2001 and increased as a percentage of revenues from 9.4% in fiscal 2001 to 10.1% in fiscal 2002. The increased spending was principally due to the costs incurred by the greater number of selling communities that we had during fiscal 2002 as compared to fiscal 2001, costs associated with the continued expansion of the number of new communities and increased insurance costs, offset, in part, by the discontinuance of amortization of goodwill pursuant to our adoption of Statement of Financial Accounting Standards Board 21
  23. 23. No. 142 in November 2001. We expect to open approximately 70 communities in fiscal 2003 as compared to 57 in fiscal 2002. In fiscal 2003, we expect SG&A will increase slightly as a percentage of total revenues compared to fiscal 2002. FISCAL 2001 COMPARED TO FISCAL 2000 Home Sales Home sales revenues for fiscal 2001 were higher than those for fiscal 2000 by approximately $418 million, or 24%. The revenue increase was primarily attributable to a 12% increase in the average price of the homes delivered and a 10% increase in the number of homes delivered. The increase in the average price of the homes delivered was the result of increases in selling prices, a shift in the location of homes delivered to more expensive areas and an increase in the dollar amount of options that our home buyers selected. During fiscal 2001, our homebuyers paid approximately 21% above the base selling price of a home for options and lot premiums, compared to 19% in fiscal 2000. The increase in the number of homes delivered was primarily due to the larger backlog of homes to be delivered at the beginning of fiscal 2001 as compared to fiscal 2000. The value of new sales contracts signed was $2.17 billion (4,366 homes) and $2.15 billion (4,418 homes) for fiscal 2001 and fiscal 2000, respectively. The increase in the value of new contracts signed in fiscal 2001 was primarily attributable to an increase in the average selling price of the homes (due primarily to an increase in base selling prices, a shift in the location of homes sold to more expensive areas and an increase in the dollar amount of options selected by our home buyers), offset, in part, by a decrease in the average number of communities in which we were offering homes for sale and the resulting decrease in the number of homes for which we signed sales contracts. The decrease in the number of communities was the result of increased regulatory requirements that delayed the opening of some new communities and new sections of some existing communities. At October 31, 2001, the backlog of homes under contract was $1.41 billion (2,727 homes), as compared to the $1.43 billion (2,779 homes) backlog at October 31, 2000. The terrorist attacks of September 11, 2001 impacted us most severely in the first few weeks immediately after the events as consumer confidence dropped, the stock market declined and our business slowed. In the six-week period following October 31, 2001, the total number of deposits was approximately 12% higher than the same period of fiscal 2000. On a per-community basis, deposits were down approximately 2% over the same period. Compared to the previous five-year average for the six-week period, deposits were approximately 6% higher on a per-community basis. Home costs as a percentage of home sales revenues decreased in fiscal 2001 as compared to fiscal 2000. The decrease was largely the result of selling prices increasing at a greater rate than costs, lower land and improvement costs, and improved operating efficiencies, offset, in part, by higher inventory writedowns. We incurred $13.0 million in write-offs in fiscal 2001, as compared to $7.4 million in fiscal 2000. Land Sales In fiscal 2001, we operated a land development and sales operation in our South Riding master planned community located in Loudoun County, Virginia. Land sales amounted to $27.5 million for fiscal 2001 compared to $38.7 million in fiscal 2000. The decrease in land sales in fiscal 2001 as compared to fiscal 2000 was due to fewer lots being available for sale in South Riding 22
  24. 24. in fiscal 2001 than in 2000, offset, in part, by increased sales of lots from several of our other master planned communities. Equity Earnings in Unconsolidated Joint Ventures In fiscal 1998, we entered into a joint venture to develop and sell land owned by our venture partner. Under the terms of the agreement, we have the right to purchase up to a specified number of lots with the majority of the lots to be sold to other builders. In fiscal 2000, the joint venture sold its first group of home sites to other builders and to us. We recognize our share of earnings from the sale of lots to other builders. We do not recognize earnings from lots we purchase; instead, we reduce our cost basis in these lots by our share of the earnings of the joint venture from the sale of these lots. Interest and Other Income Interest and other income increased approximately $5.4 million in fiscal 2001 as compared to fiscal 2000. The increase was principally due to an increase in interest income, the gain from the sale of an office building constructed by us in fiscal 2001, and an increase in earnings from our ancillary businesses, offset in part by reduced management fee income and gains from the sale of miscellaneous assets recognized in fiscal 2000. Selling, General and Administrative Expenses (quot;SG&Aquot;) SG&A spending increased by $39.4 million, or 23%, in fiscal 2001 as compared to fiscal 2000. This increased spending was primarily due to the increase in home revenues in fiscal 2001 over fiscal 2000, and costs related to the development of our master planned communities. SG&A as a percentage of total revenues was the same in fiscal 2001 and fiscal 2000. INTEREST EXPENSE We determine interest expense on a specific lot-by-lot basis for our homebuilding operations and on a parcel-by-parcel basis for land sales. As a percentage of total revenues, interest expense varies depending on many factors including the period of time that we owned the land, the length of time that the homes delivered during the period were under construction, and the interest rates and the amount of debt carried by us in proportion to the amount of our inventory during those periods. Interest expense as a percentage of revenues was slightly higher in fiscal 2002 as compared to fiscal 2001 and was slightly higher in fiscal 2001 than fiscal 2000. INCOME BEFORE INCOME TAXES Income before income taxes increased 2.8% in fiscal 2002 compared to fiscal 2001 and increased 46.3% in fiscal 2001 compared to fiscal 2000. INCOME TAXES Income taxes for fiscal 2002, 2001 and 2000 were provided at effective rates of 36.7%, 36.8% and 36.8%, respectively. CAPITAL RESOURCES AND LIQUIDITY Funding for our operations has been provided principally by cash flow from operations, unsecured bank borrowings and the public debt markets. Cash flow from operations, before inventory additions, has improved as operating results have improved. One of the main factors that determines cash flow from operations, before inventory additions, is the level of revenues from the delivery of homes and land sales. We anticipate that cash flow from 23
  25. 25. operations, before inventory additions, will continue to be strong. We have used our cash flow from operations, before inventory additions, bank borrowings and public debt to: acquire additional land for new communities; fund additional expenditures for land development; fund construction costs needed to meet the requirements of our increased backlog and the increasing number of communities in which we are offering homes for sale; repurchase our stock; and repay debt. We expect that our inventory will continue to increase and we are currently negotiating and searching for additional opportunities to obtain control of land for future communities. At October 31, 2002, we had commitments to acquire land of approximately $860 million, of which approximately $65 million had been paid or deposited. At October 31, 2002, we had a $615 million unsecured revolving credit facility with 19 banks, of which $90 million extends to February 2003 and $525 million extends to March 2006. At October 31, 2002, we had no borrowings against the facility and approximately $77.5 million of letters of credit outstanding under the facility. In November 2002, we issued $300 million of 6.875% Senior Notes. We intend to use the proceeds to repay all of the $100 million outstanding of our 8 3/4% Senior Subordinated Notes due 2006, repay bank debt and for general corporate purposes. We called for redemption all of the $100 million outstanding 8 3/4% Senior Subordinated Notes effective December 27, 2002 at a price of 102.917% of the principal amount. We will recognize a pretax charge of approximately $4 million in the first quarter of fiscal 2003 representing the premium paid on redemption and the write-off of unamortized bond issuance costs. We believe that we will be able to continue to fund our activities through a combination of existing cash resources, cash flow from operations and existing sources of credit, including the public debt markets. INFLATION The long-term impact of inflation on us is manifested in increased costs for land, land development, construction and overhead, as well as in increased sales prices. We generally contract for land significantly before development and sales efforts begin. Accordingly, to the extent land acquisition costs are fixed, increases or decreases in the sales prices of homes may affect our profits. Since the sales prices of homes are fixed at the time a buyer enters into a contract to acquire a home and we generally contract to sell a home before commencement of construction, any inflation of costs in excess of those anticipated may result in lower gross margins. We generally attempt to minimize that effect by entering into fixed-price contracts with our subcontractors and material suppliers for specified periods of time, which generally do not exceed one year. In general, housing demand is adversely affected by increases in interest costs, as well as in housing costs. Interest rates, the length of time that land remains in inventory and the proportion of inventory that is financed affect our interest costs. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting prospective buyers' ability to adequately finance home purchases, our revenues, gross margins and net income would be adversely affected. Increases in sales prices, whether the result of inflation or demand, may affect the ability of prospective buyers to afford new homes. 24
  26. 26. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk primarily due to fluctuations in interest rates. We utilize both fixed rate and variable rate debt. For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument. We do not have the obligation to prepay fixed rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we are required to refinance such debt. The table below sets forth, as of October 31, 2002, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair value (amounts in thousands): ___Fixed Rate Debt(3) Variable Rate Debt(1)(2) Fiscal Weighted Weighted Year of Average Average Expected Interest Interest Maturity __Amount__ Rate _ __Amount Rate___ 2003 $ 20,511 6.91% $53,796 3.42% 2004 2,659 6.61 4,800 4.01 2005 208,359 7.74 2,870 3.97 2006 4,885 8.51 150 1.99 2007 200,000 8.25 150 1.92 Thereafter _ 620,000 8.18 4,010 1.92 Total $1,056,414 8.05% $65,776 3.39% Fair value at October 31, 2002 $1,067,210 $65,776 (1) We have a $615 million revolving credit facility with 19 banks of which $525 million extends through March 2006 and $90 million extends through February 2003. Interest is payable on borrowings under this facility at 0.90%(this rate will vary based upon our corporate debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us from time to time. We had no borrowings against this facility at October 31, 2002. (2) One of our subsidiaries has a $50 million line of credit with a bank to fund mortgage originations. The line is due within 90 days of demand by the bank and bears interest at the bank's overnight rate plus an agreed upon margin. At October 31, 2002 the subsidiary had $49.0 million outstanding under the line at an average interest rate of 3.36%. Borrowing under this line is included in the 2003 fiscal year maturities. (3) In November 2002, we issued $300 million of 6.875% Senior Notes due 2012. We will use a portion of the proceeds from the notes to redeem all of the $100 million of our outstanding 8 3/4% Senior Subordinated Notes due 2006. We expect to complete this redemption on December 27, 2002. The 8 3/4% notes are included in the fiscal 2007 maturities. Based upon the amount of variable rate debt outstanding at October 31, 2002 and holding the variable rate debt balance constant, each one percentage point increase in interest rates would increase the interest incurred by us by approximately $660,000 per year. 25
  27. 27. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements, listed in Item 15(a)(1) and (2), which appear at pages 38 through 65 of this report and which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is incorporated herein by reference: (a) the information in Part I, Item 4A of this report; (b) the information in the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders (the quot;2003 Proxy Statementquot;) beginning immediately following the caption quot;Proposal One - Election of Directors for Terms Ending 2006;quot; and (c) the information in the 2003 Proxy Statement beginning immediately following the caption quot;Section 16(a) Beneficial Ownership Reporting Compliancequot; to, but not including, the caption quot;Certain Transactions.quot; ITEM 11. EXECUTIVE COMPENSATION The information in the 2003 Proxy Statement in the section captioned quot;Proposal One - Election of Directors for Terms Ending 2006,quot; beginning immediately following the sub-caption quot;Compensation of Directorsquot; to, but not including, the caption quot;Report of the Audit Committeequot; is incorporated herein by reference. 26
  28. 28. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the 2003 Proxy Statement subcaptioned quot;Security Ownership of Principal Stockholders and Managementquot; to, but not including, the caption quot;Proposal One - Election of Directors for Terms Ending 2006quot; is incorporated herein by reference. The following table provides information as of October 31, 2002 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance. Equity Compensation Plan Information Number of Weighted- Number of securities securities average remaining available to be exercise price for future issuance issued upon of outstanding under equity exercise of options, compensation plans outstanding warrants (excluding securities options, warrants and rights reflected in and rights column(a))(1)(2) Plan Category (in thousands) (in thousands) (a) (b) (c) Equity compensation plans approved by security holders 15,321 13.24 3,498 Equity compensation plans not approved by security holders - - Total 15,321 3,498 13.24 (1) In December 2002, the Compensation Committee of our Board of Directors, the committee that administers the stock option plans, voted to eliminate any options currently available for grant and future increases in options available for grant under the our Stock Option and Incentive Stock Plan (the quot;1995 Planquot;). Options available for grant at October 31, 2002 under the 1995 Plan were 2,269,000. The above amount does not include options available for grant under the 1995 Plan. (2) Our Stock Incentive Plan (1998) provides for automatic increases each November 1 in the number of shares available for grant by 2.5% of the number of shares issued (including treasury shares). This plan restricts the number of shares available for grant in a year to a maximum of 5,000,000 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information is incorporated herein by reference: (a) the information in the 2003 Proxy Statement in the section captioned quot;Executive Compensationquot; beginning immediately following the sub-caption quot;Compensation Committee Interlocks and Insider Participationquot; to, but not including, the caption quot;Report of the Compensation Committee on Executive Compensationquot;; and (b) the information in the 2003 Proxy Statement beginning immediately following the caption quot;Certain Transactionsquot; to, but not including, the caption quot;Stockholder Proposals.quot; 27
  29. 29. ITEM 14. CONTROLS AND PROCEDURES Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days of the filing date of this report (the quot;Evaluation Datequot;) and, based on that evaluation, concluded that, as of the Evaluation Date, we had sufficient controls and procedures for recording, processing, summarizing and reporting information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms. Since the Evaluation Date, there have not been any significant changes to our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedule 1. Financial Statements Page Report of Independent Auditors 38 Consolidated Statements of Income for the Years Ended October 31, 2002, 2001 and 2000 39 Consolidated Balance Sheets as of October 31, 2002 and 2001 40 Consolidated Statements of Cash Flows for the Years Ended October 31, 2002, 2001 and 2000 41 Notes to Consolidated Financial Statements 42-63 Summary Consolidated Quarterly Financial Data (unaudited) 64 2. Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for the Years Ended October 31, 2002, 2001 and 2000 65 Schedules not listed above have been omitted because they are either not applicable or the required information is included in the financial statements or notes thereto. 28
  30. 30. 3. Exhibits The following exhibits are included with this report or incorporated herein by reference: Exhibit Number Description 3.1 Restated Certificate of Incorporation dated July 1, 1986 is hereby incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.2 Amendment to the Restated Certificate of Incorporation dated March 7, 1989, is hereby incorporated by reference to Exhibit 3.2 of Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.3 Amendment to the Restated Certificate of Incorporation dated March 11, 1993, is hereby incorporated by reference to Exhibit 3.3 of Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.4 Amendment to the Restated Certificate of Incorporation dated June 12, 1997, is hereby incorporated by reference to Exhibit 3.4 of Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.5 Amendment to the Restated Certificate of Incorporation dated January 8, 1998, is hereby incorporated by reference to Exhibit 3.5 of Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.6 Amendment to the Restated Certificate of Incorporation dated March 7, 2002, is hereby incorporated by reference to Exhibit 3.6 of Registrant's Form 10-Q for the quarter ended January 31, 2002. 3.7 By-laws, as amended, are hereby incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K for the fiscal year ended October 31, 1989. 3.8 Amendment to the by-laws dated July 11, 2000 is hereby incorporated by reference to Exhibit 3.1 of the registrant's Form 10-Q for the quarter ended July 31, 2000. 4.1 Specimen Stock Certificate is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 10-K for the fiscal year ended October 31, 1991. 4.2 Indenture dated as of March 15, 1993, among Toll Corp., as issuer, the Registrant, as guarantor, and NBD Bank, National Association, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of Toll Corp.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission, March 10, 1993, File No. 33-58350. 4.3 Indenture dated as of November 12, 1996, among Toll Corp., as issuer, the Registrant, as guarantor, NBD Bank, a Michigan banking corporation, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K dated November 6, 1996 filed with the Securities and Exchange Commission. 29
  31. 31. Exhibit Number Description 4.4 Indenture dated as of January 26, 1999, among Toll Corp., as issuer, the Registrant, as guarantor, and NBD Bank, a Michigan banking corporation, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on July 13, 1999 with the Securities and Exchange Commission. 4.5 Indenture dated as of January 25, 2001, among Toll Corp., as issuer, the Registrant, as guarantor, and Bank One Trust Company, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 10-Q filed with the Securities and Exchange Commission for the quarter ended January 31, 2001. 4.6 Indenture dated as of November 22, 2002 between Toll Brothers Finance Corp., as issuer, the Registrant, as guarantor, and Bank One Trust Company, as Trustee, including form of guarantee, is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the Securities and Exchange Commission on November 27, 2002. 4.7 Authorizing Resolutions, dated as of November 6, 1996, relating to the $100,000,000 principal amount of 8 3/4% Senior Subordinated Notes of Toll Corp. due 2006, guaranteed on a Senior Subordinated Basis by Toll Brothers, Inc., is hereby incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on November 15, 1996 with the Securities and Exchange Commission. 4.8 Authorizing Resolutions, dated as of September 16, 1997, relating to the $100,000,000 principal amount of 7 3/4% Senior Subordinated Notes due 2007 of Toll Corp., guaranteed on a Senior Subordinated basis by Toll Brothers, Inc. is hereby incorporated by reference to Exhibit 4.5 of the Registrant's Form 10-K for the fiscal year ended October 31, 1997. 4.9 Authorizing Resolutions, dated as of January 22, 1999, relating to the $170,000,000 principal amount of 8 1/8% Senior Subordinated Notes of Toll Corp. due 2009, guaranteed on a Senior Subordinated basis by Toll Brothers, Inc., is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on January 25, 1999 with the Securities and Exchange Commission. 4.10 Authorizing Resolutions, dated as of April 13, 1999, relating to $100,000,000 principal amount of 8% Senior Subordinated Notes of Toll Corp. due 2009, guaranteed on a Senior Subordinated basis by Toll Brothers, Inc. is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on April 14, 1999 with the Securities and Exchange Commission. 4.11 Authorizing Resolutions, dated as of January 23, 2001, relating to $200,000,000 principal amount of 8 1/4% Senior Subordinated Notes of Toll Corp. due 2011, guaranteed on a Senior Subordinated basis by Toll Brothers, Inc. is hereby incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on January 24, 2001 with the Securities and Exchange Commission. 30

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